Monday, May 10, 2010

Tun Mahathir's Dow Jones Post -the Uranus Monkey's reply

1.I don't play the stock market but I cannot think of anything more silly than computer programmed buying and selling of shares.

2. The program can work if only a few players make use of it. But when the program is available to tens of thousands, then their concerted programmed buying and selling will surely affect the market.

3. Simultaneous buying by thousands of players will push up the prices very high while simultaneous selling by tens of thousands would push down the prices to extremely low levels.

4. That was what happened when Dow Jones went down by 1,000 points. And as the index go down the computer would direct the players to sell more, and again the index would plunge.

5. As can be expected the other stock markets would panic and follow Dow Jones. Then the whole world would lose market capitalisation for no good reason other than the effect of the computer's programme.

Bawak bertenang Tun.....let me try to provide you with a clearer picture....in a not too technical way I hope..

First you must understand the transactional infrastructure in the Global Capital Markets and in America in particular....

Let us begin by defining the type of systems involved in executing the trades....

As we all may know there is a Central Trading Engine at the Exchanges where all orders are consolidated and matched according to its matching rule eg: Continuous Auction or Periodic Auction

Each of the Exchange Members typically connect to the Central Trading Engine via their own Order Management Systems or the Exchange Order Management system - the access is typically done via a secure and high availability low latency connectivity.......

Their smaller customers in turn connect to the Members order management system via telephone or systems such as Electronic Trading systems (can be Web Based or Mobile), their bigger customers(Institutional Investors) typically would want to connect directly to the Exchanges so that they are able to have the same execution capabilities as the Exchange Members..... so what they do is access the Central Trading Engine using a Direct Market Access Technology......I wrote about it sometime back go here

Tun....u still here..... :)

In America as you may know........there is bersepah2 Alternative Trading Systems which is competing directly with the Exchanges.....some of them grew so big and is killing the exchanges market shares......

So one Security can be traded in Multiple Venues at the same time........bukan macam kat Malaysia ni Tun...dulu adela kejap masa Central Limit Order Book was operated kat Singapore..but after we ban the thing....hilang.......

OK Tun , now back to this one security can be traded at Multiple Places..........

Investors and Market Participants are free to trade where they want.......i.e. I will choose an execution venue where I have the ability to trade with the lowest cost, lowest risk and the fastest execution time.....

So in order to do that Investors and Market Participants now must connect to Multiple Trading Venues just to be able to have the ability to say buy MicroSoft or IBM at the best price.......

Regulation National Market System..go here for details.......that rule tried to consolidate all this activities (buy/sell orders) on all NMS Securities so that there will be a National Best Bid and Offer.......for investors to be able to execute the trades at the National Best Bid/offer irrespective of where the quotation/order came from......

Sounds like an impossible thing considering that everything is happening in sub-miliseconds.....

This is facilitated with the development of low latency messaging technology......macam masuk gua kita jerit hoi.....hoi sampai balik berapa lame.........

What is interesting is that this regulation is enforced on the market participants to fulfil their fiduciary duty of putting their customers orders first and at the best execution.......and also to provide greater pre and post trade market transparency......(it also aim to tackle discriminative market access policy by some ATS operated by Competing Players who tried to restrict access to their Bid/Offer data)

So everybody pun started investing in Aggregation Tools that can consolidate the National Best Bid and Offer so that they can fulfil that requirement.....

Numerous number of systems are connected from End Investors all the way to Central Trading Engine this is just for execution and not for settlement (that's a whole different story altogether)

Investors trade in Multi Market (domestically n internationally) and have multi relationship with various Broker Dealers and have various investment objectives....mmm i didnt write anything above but I think this statement is self-explanatory

Regulators wants greater market transparency and to some extent try to correct the market fragmentation that happened after the proliferation of ATS, Dark Pools of Liquidity etc so that Investor are able to execute the trade of a particular security at the National Best Bid and Offer...

It can be defined as Computer Driven, algorithm based trading at speeds measured in millionth of a second

For further info on HFT, its market, the players and the technology go here and here

This is a relatively new market but a hot one indeed.......it came about with the development of Messaging Technology, Market Deregulation on Exchange Access, Demutualisation and Computer Processing Speeds.........if you look at the statistics you'be be surprised

Two factors at work here....the Program Traders.....and the HFT activity....

The Program Traders are Algorithm that look into Market Signals based on Prices, Index, Economic Data or Key News that drive prices of securities either up or down......

Why algorithm.....

The truth is Tun.....Today more than ever the need for information to assist the decision making process is of a paramount importance. The technological revolution that has fueled capital market globalization, of course, is not limited to market participants and institutional investors.......... Computing and communication technology have advanced so rapidly and have spread into so many different aspects of our lives that the information available to all market participants today is not just quantitatively different, but has resulted in a qualitative change as well. While the need to make decisions under conditions of insufficient information, the fog of war applied to the financial world, still remains, it is overlaid by the problem of vast quantities of information available to us in real time.

Information-processing technology has made managing this information not just possible, but possible at unprecedented speed...........

Not only that but the sources of information available to market participants have proliferated..bersepah2 sampai pening kepala nak pikir.......... Some of this information is formalized, such as the press releases issued by companies, news reports put out by media outlets using a formal editing and review process, or government statistics......... Some of this information is mandated by regulation, such as corporate financial filings, presented through a formalized process determined by national accounting standards......... Other information is informal the high-tech equivalent of gossip received from some media reports, blogs, and other sources. Rarely is any of this information complete and in many cases the information is inaccurate.

Nonetheless, collectively the information forms part of an ever-changing mosaic that investors, regulators, and others use when assessing a situation under conditions of uncertainty.

One common thread, however, is that today all of this information is globalized. These new sources and ways of distributing information create enormous opportunities to enhance the effciency of our markets.

While vastly improving market efficiency, these new sources of information have also introduced new, previously unimagined, risks. For the largest firms, even small information processing errors have proven to have potentially devastating effects. For investors, the sheer volume of information presents filtering problems. While this has generated demand for professional information gatekeepers and filtering services (i.e., securities analysts, credit rating agencies, private news services, etc.), heavy reliance on these professional services also raises new risks, ranging from conflicts of interest to moral hazard.....................and all of this information is sedikit susah to process pakai kepala otak kita aje Tun.....

So now back to your suggestion....

Governments should ban computer programming for stock market gambling

Tak boleh la itu macam Tun......ade sikit kureng.....

What your No 6 Should have been is

Can broker/dealer monitor, supervise and control all activities that happen under its name for those who provide Direct Market Access or Sponsored Access to other market participants?

And how is the Risk Control enforced by Broker dealers to ensure that sponsored participants or those connected direct to the Public Markets adhere to rules and regulation?

Even In America they are also kelam kabut big time on this issue....go here for details and the regulatory statements here

Lets start the discussion that way.....much better than you lompat terus to ask for ban something that you may not have the full info on.....we can go to other related topics after they can answer that one first

Another thing about Algorithm Trading is that it takes the emotional response out...eg: Say you buy telekom Malaysia at 9.00 and promise yourself to sell it if it reaches 11 or cut your loses if it falls to 7.....say market is now at 7.00....and you are travelling from the lift to your desk...by the time you sampai to your desk market is now at 6.90.....you then garu kepala on whether to sell or not....besok la..

A computer program would just execute the pre-defined orders as long as the specific conditions are fulfilled..........no questions asked......they used the same thing on Flood Barriers in UK and Holland......

MOLE.my

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